Friday, January 22, 2016

Wombling And Fumbling With Fuel Prices

By Henry Boyo

The
Petroleum Products Pricing Regulatory Agency’s Executive Secretary, Farouk
Ahmed, reportedly announced, at a press briefing in Abuja on 29th December,
2015, that a revised template for fuel pricing had been approved by the Agency;
the announcement was evidently the formal manifestation of the ‘modulated
pricing’ model earlier canvassed by Ibe Kachikwu, the NNPC CEO and current
Minister of State for Petroleum. Thus, with the adoption of the new template,
petrol price will be reduced from N87 to N86 in NNPC filling stations, while
other marketers would sell at a pump price of N86.50/litre.

However,
in contrast to the previous static cost template, fuel prices would henceforth
be reviewed quarterly to reflect fluctuations in any cost variable. Indeed,
Kachikwu had also corroborated the thrust of the new template when he
emphasized in an earlier press briefing in Kaduna on December 2015 that “we are
not going to be fluctuating prices day to day, we are going to take like an
average, and I think that today when you look at the prices, we have no
subsidy, because prices remain low and that is what we need to do”. Kachikwu’s
statement probably suggests that the reviewed fuel price has fallen below the
existing subsidy threshold of N87/litre; consequently, government decided to
pass on between N1 and 50Kobo/litre discount on petrol prices to the public,
despite the oppressive N2Tn projected loan required to fund 2016 budget
deficit. The PPPRA’s modulated response to fuel pricing is allegedly a
demonstration of government’s “honesty in being able to sell products to
Nigerians at affordable prices that make sense”. Nonetheless, the Minister is
certain that we still need to get out of the subsidy debacle, because, according
to him “the reliability and affordability of subsidy are issues we need to get
away from, whether or not you believe in subsidy”.

Furthermore,
if unrestrained dollar demand in the parallel market continues to wag the
official Naira exchange rate, the CBN may inevitably succumb and fatally commit
to another significant Naira devaluation. However, if an additional 25 percent
Naira devaluation becomes necessary to bridge the wide gap between increasingly
divergent Naira exchange rates between N200-N300/$1, fuel price will once again
spike well above N140/litre, irrespective of the application of the reviewed,
presumed responsive PPPRA template. Thus, it would certainly be purely
speculative to predict public response to any attempt by government to honestly
reflect the higher cost variables, if fuel price increases unexpectedly,
particularly, when crude prices conversely remain low.

Dr. Ibe Kachikwu

Nevertheless,
if Naira exchange rate depreciation persists, petrol prices will inevitably
remain volatile and ultimately create severe tensions between the people and
government. It is understandable that government should be sensitive to the
current impoverished state of Nigerians, however, a patriotic reformist
administration should also be responsible enough to take hard decisions to save
the economy, even if such decisions make government temporarily unpopular.

Thus,
it is possible that if President Buhari increases fuel price from N87 to
N100/litre, the treasury will swell by almost N800m everyday from the sale of
the alleged 40m litres of petrol consumed daily. Indeed, if crude oil price
further dips, about N365bn could be consolidated annually to reduce the clearly
unwieldy N2Tn plus deficit in the 2016 Appropriation bill. Similarly, if
kerosene is also readily available and sells for about N70-80/litre nationwide
without subsidy (rather than over N120 black market price with subsidy and
scarcity), government could additionally generate over N100bn to further reduce
the deficit in the 2016 budget.

Incidentally,
the present Administration’s game plan on fuel pricing uncomfortably mirrors
former President Jonathan’s reduction of fuel price from N97 to N87/litre,
prior to the 2015 elections, despite the prevailing worrisome bulging deficit
which needed to be funded with unusually high interest rates for a resource
endowed Sovereign Nation like ours.

In
retrospect, if Jonathan had patriotically and responsibly risked pre-election
popularity and increased government revenue by retaining fuel price at
N97/litre or possibly even raising it up marginally to N100/litre, with an
irrevocable commitment to maintain adequate supply at all times, the N600bn (15
percent of 2015 budget) lately approved as supplementary budget on December 1st
2015, to clear outstanding fuel subsidy bills, may not have been necessary, and
our crushing debt burden would have also become lighter. Besides, fuel scarcity
and its attendant social agony would probably have also become minimised, as
petrol marketers would be eager to import and enthusiastically supply fuel to
meet demand, if a deregulated price regime prevailed.

Expectedly,
however, the Treasury friendly price advantage induced by the slump in crude
price under Jonathan was, soon after, wiped out with a subsequent 30 percent
Naira devaluation which spiked fuel price to once again inadvertently ‘force’
subsidy into the existing pricing template; sadly a similar Treasury friendly
price advantage has again been made possible under Buhari, ironically, also by
the increasingly low crude oil price below budget benchmark; nevertheless,
further naira devaluation, hereafter, would inevitably, similarly push fuel
price back into the realm of subsidy and contention between the people and
government.

This
column has consistently explained that weaker Naira exchange rates instigate
high fuel prices which provoke demand for subsidy; however, public expectation
was inexplicably shattered when bountiful and exceptional dollar reserves
failed to strengthen the Naira exchange rate and conversely reduce fuel price;
a bizarre case of “Tails you lose and Heads I win”. It is ironical that we
should rely on reduction in crude prices to bring down fuel prices and remove
subsidy, when clearly, our revenue expectations, and the capacity to develop
critical social infrastructure also become severely challenged when crude oil
price falls.

Furthermore,
Kachikwu had also suggested in an interaction with the press in December 2015
that government refineries would soon achieve production output of up to 10
million litres daily; unfortunately, however, the Minister did not confirm if
the price of the products locally refined from government owned refineries
would be anyway cheaper than the equivalent imports as per public expectation.

Indeed,
According to Farouk Ahmed, the NNPC will be responsible for over 78 percent of
the total fuel supplies in 2016; nonetheless, in view of the wide margins
between parallel and official Naira exchange rates, further devaluation must be
on the card and it would be revealing, therefore if NNPC has strategically,
knowingly projected an amount for fuel subsidy in their 2016 budget; it would
be equally of interest to know the National Assembly’s reaction to such
provision.

In
reality, however, if systemic excess Naira supply persists, the Naira exchange
rate will continue to slide and instigate higher fuel prices and make the
attainment of a subsidy free fuel price a challenge as we continue to discount
the Naira value while subsiding the dollar exchange rate. In such event, the
debt burden will increase as fuel prices continue to rise to make subsidy
inevitable and poverty will only deepen nationwide.